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July 17, 2012

Bernanke to Senators: Don’t Dawdle in Addressing Fiscal Cliff

Sen. Schumer doubts Congress can agree on fiscal policy, says Fed is ‘only game in town’

Fed Chairman Bernanke at a Senate hearing last year. (Photo: AP)

Federal Reserve Chairman Ben Bernanke signaled to senators on Tuesday that more quantitative easing measures might be taken and urged lawmakers to not dawdle in addressing the nation’s fiscal woes.

In testimony before the Senate Banking Committee as part of the Fed’s semiannual report to Congress on monetary policy issues, Bernanke said that “reflecting its concerns about the slow pace of progress in reducing unemployment and the downside risks to the economic outlook,” the Federal Open Market Committee (FOMC) “made clear at its June meeting that it is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Bernanke told lawmakers that the two areas of gravest concern—and biggest risks to the nation’s recovery—are the sovereign debt and banking situation in Europe “that remains unresolved and that poses a drag on the U.S. economy,” as well as the U.S. fiscal crisis. “Congress, in the short term, should address the debt limit and, in the medium term, address fiscal sustainability,” he told lawmakers.

Jim O’Sullivan, chief U.S. economist for High Frequency Economics, says that Bernanke “does not seem ready to ease again” as soon as the next FOMC meeting on July 31-Aug. 1. However, he says, “we expect the Fed will ease again before year-end.”

Addressing the nation’s “fiscal cliff,” in which spending cuts and tax increases must be addressed by year-end, Bernanke said that a combination of allowing all of the Bush tax cuts as well as payroll tax cuts to expire along with the sequestration issue will result in a “shock of 4.5% of GDP.”

Bernake cited in his testimony the Congressional Budget Office (CBO) estimate that if the full range of tax increases and spending cuts were allowed to take effect—the “fiscal cliff” scenario—“a shallow recession would occur early next year and about 1-1/4 million fewer jobs would be created in 2013.”

These estimates, Bernanke said, “do not incorporate the additional negative effects likely to result from public uncertainty about how these matters will be resolved. As you recall, market volatility spiked and confidence fell last summer, in part as a result of the protracted debate about the necessary increase in the debt ceiling. Similar effects could ensue as the debt ceiling and other difficult fiscal issues come into clearer view toward the end of this year.”

Sen. Chuck Schumer, D-N.Y., told Bernanke that he doubts whether Congress can agree on a fiscal policy before, or after, the presidential election in November. “Given the political realities, the Fed is the only game in town” that can do anything to bolster the economy, he said.

“We’ve tried tax cuts; we’ve tried increased investments in infrastructure…and have run into opposition on all fronts,” Schumer said. “The bottom line is we are not going to get the fiscal relief” from Congress that’s needed. “I would urge you now more than ever to take the actions necessary” to bolster the economy, Schumer told Bernanke. “Get to work, Mr. Chairman.”

Bernanke responded that the Fed “will act in a nonpartisan manner to do what it takes” for the economy.

The Fed chairman noted in his testimony that although the housing market has “shown improvement, the contribution of this sector to the recovery is less than has been typical of previous recoveries,” adding that “the reduction in the unemployment rate seems likely to be frustratingly slow,” with forecasts predicting that the unemployment rate will be at 7% or higher at the end of 2014.

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